Leon Black’s Apollo Global Management LLC (APO), the private-equity firm that is seeking to rebuild its real estate arm, is raising $750 million for a pair of funds that will focus on commercial properties in Asia.
The AGRE Asia Pacific Real Estate Fund LP filed a private- placement notice last month with the U.S. Securities and Exchange Commission to seek as much as $600 million of capital. The New York-based management company is also teaming up with Bank of East Asia Ltd. to raise $150 million for a related fund that will focus on China, according to a separate July filing.
Black spun off Apollo’s real estate operations in 2000, only to reenter the industry eight years later to help reduce the firm’s reliance on revenue from traditional leveraged buyouts. Apollo has primarily invested in markets such as Asia through its global funds.
“From the institutional perspective, the interest in investing in the Asia region has increased exponentially,” said Tara Blackburn, a managing director in the San Francisco office of Hamilton Lane, a Philadelphia-based private-equity investment and advisory firm that oversees about $158 billion in assets. “The big challenge is trying to find the right avenue to gain exposure.”
About 388 buyout funds tied to Asia are in the market to raise a combined $130 billion, according to Preqin, a London- based firm that provides research on alternative-asset managers. These include KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, which got $3 billion in commitments during the initial fundraising for its second Asia-focused fund.
“The way we look at the world right now, people want Asia, they want energy and they want yield,” Scott Nuttall, KKR’s global head of capital and asset management, said during a July 27 earnings call with analysts, according to a transcript.
Apollo had about $8 billion in real estate assets under management at the end of June, or about 7.6 percent of the $105 billion the firm oversees, according to a transcript of the second-quarter earnings call the company held Aug. 2. Blackstone Group LP (BX), the New York-based buyout firm run by Stephen Schwarzman, said in a July earnings release that it was managing $50.2 billion in real estate assets, or 26.4 percent of its $190.3 billion total.
Apollo’s latest quarterly report, filed with the SEC in May, lists a single hedge fund dedicated to Asia. The Apollo Asia Opportunity Fund, with net assets of $218 million as of March 31, generated a cumulative return of 9.5 percent since it began investing in February 2007, according to the filing. Apollo Asia decided to wind down its offshore unit as AP Alternative Assets LP, a publicly traded vehicle that invests alongside Apollo’s private funds, planned to cash out its stake, the firm said.
“Asia has not historically been a huge focus for Apollo,” Jason Stewart, a managing director at Compass Point Research and Trading LLC in Washington, said in an e-mail. “But it hasn’t been enormously successful in dollar returns for any alternative-asset managers either, yet.”
In April, Black’s firm filed two private-placement notices with the SEC saying it had raised about $255 million for a private-equity vehicle called Apollo Asia Private Credit Fund LP and an offshore affiliate. The firm followed up with filings for the new Asia fund, which plans to make “opportunistic” real estate investments to recapitalize, restructure and acquire real estate assets, portfolios and companies, according to an Apollo regulatory brochure.
“Opportunistic in the real estate world means you are shooting for higher returns,” said James Corl, managing director of distressed real estate at Siguler Guff & Co., a New York-based private-equity investment firm. “But when you shoot for higher returns in a growthy economy” such as China’s, Corl said, “you have to take on a lot of risk.”
As China’s economy slows, there may be more opportunities for Apollo to buy income-producing properties, including apartment buildings, at distressed prices, said Ralph Jaeger, a managing director in Siguler Guff’s Boston office. Black’s experience in distressed investing dates back to the early 1990s, when he earned some $2 billion in partnership with Credit Lyonnais SA by purchasing a high-yield bond portfolio from insolvent Executive Life Insurance Co.
Since the Chinese government tightened available credit in 2010, particularly for real estate, some local developers have gotten stuck with half-finished projects that have become distressed because they can’t get financing, Jaeger said. Many of the developers listed on Chinese stock exchanges trade at discounts to the net value of their assets.
“There are going to be a lot of problems,” said Jaeger, who helps run a $1.5 billion private-equity fund that invests primarily in the so-called BRIC countries of Brazil, Russia, India and China. “But the magnitude is somewhat unforeseeable.”
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